Two weeks ago, the technology sector experienced its first significant one-day selloff – and the financial news networks went crazy. Some of the so-called financial experts even said it’s time to get rid of all tech stocks in your portfolio.
But on Tuesday, the sector rallied more than 1%, driving the Dow and S&P 500 to new record highs. And this time, all of those “experts” were saying it’s now the perfect opportunity to buy tech stocks.
Now these are the type of contradictions in the financial press that can be both confusing – and detrimental – to your portfolio.
So forget their media chatter and speculation…
Here’s what the leaders of the pack – “the FANGs” – are predicting…
Another Pullback is Closer Than You May Think – Here’s Why
“The FANGs” in this sense are what I and the rest of the markets call the four biggest tech stocks: Facebook, Inc. (FB), Amazon.com, Inc. (AMZN), Netflix, Inc. (NFLX), Alphabet Inc. (GOOGL) (although I still refer to all of them as Google). These are the stocks that account for a significant percentage of the price increases in the stock market. In fact, on June 5, GOOGL was up 25.2%, AMZN was up 33.8%, NFLX was up 32.3%, and FB was up 32.3%.
After the big tech selloff two Fridays ago, a couple of these stock have tried to ramp up to new closing highs. In fact, FB has retraced upwards, and as of this writing, is within two point of its all-time closing high of $154.71 back on June 8.
AMZN reached an intraday high on Monday, June 19, after announcing its largest acquisition in the company’s history, Whole Food’s Market, Inc. (WFM), but has since settled back in right around $997 per share.
GOOGL, you could say, is in third place based on its performance post the June 9 drop. It hasn’t done what FB and AMZN, did in terms of trading up to its highs yet again. Actually, GOOGL has returned to its closing price lows of June 9 of $970.12.
NFLX has shown the least impressive performance of the four since that June 9 selloff. It, like the others, dropped a bit lower from that day’s closing price… but where the others have shown some fight in them to move higher, NFLX hasn’t even made it back to its June 9 closing low. It now trades at $152.
What this all means is that the media heads who have been jumping for joy at the prospect of a continued rally higher jumped a little too soon.
And I’m going to show you why using the Technology Select Sector SPDR ETF (XLK), which tracks the overall technology sector. Keep in mind that AMZN and NFLX aren’t necessarily categorized as technology stocks, so they’re not grouped into this ETF. But FB and GOOGL are the third- and fourth-highest weighted stocks in this ETF, respectively, following Apple Inc. (AAPL) and Microsoft Corporation (MSFT). So you can still get a clear picture of what’s about to happen next.
Below is a chart that shows XLK mirroring the price action of GOOGL in that it hasn’t retraced back to its all-time highs and, instead, has managed to claw its way back up to its June 9 closing low.
The 50-day Simple Moving Average (SMA) was tested as support, of which XLK hasn’t sprung too far up from that and has held as support for now.
And if you look at the chart on all four of these with the 50-day SMA, you will see that all of them – except for GOOGL – have tested that moving average as support. GOOGL has held just above that. So my contention is that XLK has not retraced back to its all-time highs since the tech selloff on June 9 because only two of these four stocks are in that tech ETF – so it hasn’t acted as strong as FB and AMZN. Furthermore, my assessment is that the 50-day SMA needs to continue to hold as support on any kind of retest.
And without any other catalysts that will drive investors to put their money in tech stocks right now, then you’re looking at a breach to the downside. In fact, I could see a consolidation back to the June 9 closing lows that could drive the overall sector even further down in price.
That means employing a bearish approach – not a bullish one – could be your best profit opportunity.
And trust me… I realize even considering a bearish strategy, such as buying puts, on these stocks may not feel all that comfortable – especially when they’ve climbed so much higher and are considered to be the leaders of the entire sector.
Just keep in mind that employing a bullish strategy on FB, GOOGL, or even XLK could be beneficial for a quick bounce right now – but not in the coming weeks or months where, as the numbers show, you’re looking at the potential for another major selloff.
To your continued success…
Tom Gentile
